Our response focuses on the three issues Professor Franck identifies in the second half of her post, namely the questions of risk allocation, whether NPM clauses constitute an exception to liability, and, finally, whether the Argentine cases have broader applicability.

First, Professor Franck suggests that our paper treats bilateral investment treaties (BITs) as risk allocation devices. We fully agree with Professor Franck and recognize in our paper that BITs perform (or at least are assumed to perform) a broad range of functions including many of those she mentions. If one looks to the origin of the US BIT program, however, it becomes apparent that BITs also represent a bargain between free traders, who favored strong investor protections, and protectionists, who sought to preserve state freedom of action, particularly in the national security domain. The Exon-Florio Amendment is an oft-cited example of this bargaining process. Our focus on the risk allocation function of BITs is in part a response to this early bargain that underlies many states’ BIT programs. While scholarship to date has largely focused on the investor protection side of that bargain, our analysis of non precluded measures (NPM) clauses looks at how states have sought to limit their risks under BITs while simultaneously protecting cross-border investment.

We do not, however, argue, as Professor Franck seems to suggest, that BITs are “akin to a form of insurance” to protect “bad business judgments.” Rather, we recognize that BITs containing NPM clauses strike a balance. On one side of that balance, the substantive protections of the BIT limit the risks faced by investors by providing them legal recourse when their investments are interfered with by host states. On the other side of the balance, the NPM clauses in those BITs limit the risks faced by host states in the kinds of emergency situations covered by the NPM clause. The resulting treaty thus reflects the bargain between the two sets of interests in both the capital exporting and host states that allocates risks between the host state and investors.

Second, Professor Franck raises the interesting question of whether NPM clauses should be thought of as an exception to or an exclusion from liability. In fact, as the comparative analysis in our article recognizes, different states frame their NPM provisions in different ways. The net effect of either framing, however, is to remove actions taken by the host state that fall within the scope of the NPM clause from the substantive protections of the BIT and thereby preclude liability.

Professor Franck is correct to note that in most cases the affirmative defense of necessity in customary international law should be unnecessary where a BIT contains an NPM clause. More specifically, where a treaty contains an NPM clause of comprehensive scope, the narrow necessity defense under customary law will generally not become relevant. NPM clauses are generally drafted to provide states greater flexibility to respond to emergency situations than would have been available under the customary law defense of necessity. Hence, if a measure fails to be in conformity with the broader treaty-based NPM clause, it will also fail the narrower customary tests, and where it is covered by the NPM clause, the question of whether it also meets the customary necessity requirements becomes moot. There are two situations, though, in which the customary defense may become outcome-determinative. The first is provided by cases in which the BIT at issue does not contain an NPM clause to begin with; in such a case, the respondent state is left with the defenses provided by the customary law of state responsibility. The second concerns cases in which the applicable BIT does include an NPM clause, but of the limited type. Here, the NPM clause may fail to cover a certain state measure because the latter infringes on a treaty provision that falls outside of the NPM clause’s scope, but that measure may still be covered by the necessity defense whose coverage is not as such limited to any specific provisions.

Third, Professor Franck asks whether the Argentine cases are representative and make good law. We suggest that in increasingly globalized world, the threats of economic collapse, public order emergencies, or pandemic diseases are becoming all too common and that the Argentine experience is, unfortunately, likely to be repeated elsewhere if in a somewhat different form. From the jurisprudence of the ICSID tribunals that have issued awards in the Argentine cases thus far, it appears that these cases are not, in fact, leading to good law. As the Annulment Committee in the CMS case observed, the CMS Tribunal provided an “erroneous interpretation” of the NPM clause in the U.S.-Argentina BIT that “could have had a decisive impact on the operative part of the award.” Hard cases may well make bad law and we must hope that the Annulment Committee report and the cases against Argentina still to be decided will push toward better law that reflects the treaty commitments of Argentina and the United States.

On this point, Professor Franck further suggests that the significant sums awarded against Argentina thus far are statistical outliers. Her own empirical work on this question indicates that many ICSID awards are in fact relatively small, particularly compared to the awards against Argentina that routinely run into the hundreds of millions of dollars. Even if these awards are statistical outliers, states within the ICSID system are certainly taking notice. In May 2007, for example, Bolivia notified the World Bank that it was withdrawing from the ICSID Convention and Bolivian President Evo Morales urged his Latin American counterparts to do the same. Other states such as Venezuela and Ecuador have noted the desire to limit ICSID jurisdiction and minimize potential BIT liability. Bad law, even in a few outlier cases, thus poses real challenges to the legitimacy and effectiveness of the ICSID system and investor-state arbitration more generally. By fully recognizing the risk allocation states sought to create when they included NPM clauses in their BITs, that threat to the legitimacy and effectiveness of ICSID arbitration may be avoided. We hope our paper can contribute to that process.

Our article examines the tension between the protection of the rights of cross-border investors and the ability of states to craft policy responses to emergency situations under bilateral investment treaties (BITs). In an ever more globalized world in which exceptional circumstances such as financial crises, terrorist threats, and public health emergencies are all too common, the allocation of risks between international investors and the host states of their investments with respect to state policies that seek to address such threats but may harm investor interests in the process is emerging as a critical question in the law of international investment.

As the number of BITs has expanded exponentially over the past decade and the number of claims brought before the International Center for the Settlement of Investment Disputes (ICSID) has likewise increased, states have come to face significant liability toward investors for their policies designed to respond to emergency situations. For example, in the last weeks of 2001, Argentina experienced a financial collapse of catastrophic proportions. In response to the crisis Argentina adopted a number of measures to stabilize the economy and restore political confidence, including a currency devaluation, that also imposed immediate and painful costs on all participants in the Argentine economy, including foreign investors. As a result, Argentina has become subject to no fewer than forty-three ICSID arbitrations brought by investors who assert that Argentina’s response to the crisis harmed investments protected by various BITs. Argentina’s potential liability from these cases alone could be greater than U.S.$8 billion, more than the entire financial reserves of the Argentine government in 2002.

While BITs are often thought of as extraordinarily strong instruments of investor protection, many such treaties contain an under-studied and long-dormant provision designed to protect state freedom of action in exceptional or emergency situations. For example, Argentina’s BITs with the United States, Germany, and the Belgian-Luxembourg Economic Union (“BLEU”) each contain a non-precluded measures (NPM) provision that limits the applicability of investor protections under the BIT in exceptional circumstances. These NPM clauses allow states to take actions otherwise inconsistent with the treaty when, for example, necessary for the protection of essential security, the maintenance of public order, or to respond to a public health emergency. NPM provisions effectively permit host-state impairment of covered investment and, in turn weaken the BIT as a means of investor protection. As long as the host-state’s actions are taken in pursuit of one of the permissible objectives specified in the NPM clause, acts otherwise prohibited by the treaty do not constitute breaches of the treaty and states should face no liability under the BIT.

The traditional understanding of BITs is that host states commit through such treaties not to injure foreign investors or, at least, to bear the costs if they do. We argue that NPM clauses perform a risk-allocation function, transferring the costs of harming an investment from host states to investors in exceptional circumstances. Under BITs that include NPM clauses, the state must compensate investors for harms that breach the treaty in ordinary circumstances, but in exceptional circumstances, such as the Argentine financial crisis, NPM clauses transfer those risks to the investor and the state will not be liable for actions that would ordinarily breach the BIT.

NPM clauses such as those in the Argentine treaties noted above are in fact relatively widespread in the legal regime governing international investment. They appear regularly in the BITs of states that play a major role in the international financial system, such as Germany, India, the Belgian-Luxembourg Union, Canada, and the United States. They also arise sporadically in particular BIT relationships of numerous other states. Of the 2000 BITs presently in force, NPM clauses appear in at least 200 such treaties. Hence, the implications of such clauses for the risk allocation between states and investors proves critical to the broader architecture of international investment law.

Our article provides a detailed and comparative analysis of the use and interpretation of NPM clauses in the practice of key states including the U.S., Germany, and India. From a technical perspective, we examine the key elements of NPM clauses and explore the potential interpretation of these clauses in the practice of states-parties to BITs. In so doing, we argue that many BITs containing NPM clauses are and were intended to be weaker instruments of investor protection then generally assumed and that they represent a more subtle bargain between investor protection and state freedom of action in exceptional circumstances than most scholars, or investors for that matter, have recognized.

Arbitral awards have recently been handed down by ICSID panels in the first four of the many cases brought against Argentina under the U.S.-Argentina BIT as a result of the economic crises. The four tribunals, however, took diametrically different approaches to the NPM clause of the U.S.-Argentina BIT. On identical facts, three tribunals found the NPM clause inapplicable and held Argentina liable for damages to investors in breach of the BIT. A fourth tribunal found Argentina’s invocation of the clause justified and held Argentina not liable for harms to investors caused during the period of necessity created by the economic crisis. In addition, an Annulment Committee under the ICSID Convention reviewed the first of these awards to hold Argentina liable and, found it to contain “errors and lucans” of law, apparently vitiating the award of precedential value and perhaps even calling into question the legitimacy of the ICSID system itself.

We further argue that the tribunals that have addressed NPM clauses to date have often failed to engage in the kind of rigorous treaty interpretation mandated by the Vienna Convention and instead have taken interpretive short-cuts that threaten the very legitimacy of the investor-state arbitration system. Underlying the analysis of NPM clauses in our paper is a call for arbitral tribunals to return to first principles of treaty interpretation and to give serious consideration to the text of a treaty and, to the degree permissible under the Vienna Convention, the intent of states entering into such a treaty.

From a practical perspective, our article provides an urgently needed framework for understanding, interpreting and applying NPM provisions in BITs. More broadly, we seek to use the interpretation of NPM clauses to consider more general issues about the process of treaty interpretation. Our paper offers four theoretical contributions to the existing literature on treaty interpretation, investment regulation, and international arbitration. The article’s first theoretical contribution is to question the standard assumption that BITs are solely instruments of investment protection by recognizing that such treaties often incorporate significant exceptions that preserve state freedom of action in exceptional circumstances. A second theoretical contribution is that the article begins a heretofore overlooked exploration of the legal mechanisms through which states control and allocate risks in their bilateral treaty agreements. Third, we critique the approach taken by all of the ICSID tribunals in the Argentina cases thus far, suggesting that their one-size-fits-all approach to interpretation does not reflect the range of meanings states have intended for NPM clauses. Finally, we suggest that the ICSID system would be strengthened if arbitral tribunals were to import the margin of appreciation doctrine from the European Convention on Human Rights and Fundamental Freedoms (ECHR) to the international investment context with respect to issues that touch at the core constitutional issues of the state in question, using the margin as a template for determining the deference to be accorded to a state’s own invocation of NPM provisions.

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